How to Fix Your Credit Score

No matter the reasons behind your credit struggles — be it simple overspending, a job loss that led to some no-way-to-win financial decisions, or some other money challenge — there are steps you can take to turn this situation around.

In fact, we’ve come up with a three-step credit improvement plan to help.

We’re not gonna lie: Rebuilding your credit is going to take some work, and some patience. The credit score system can be frustratingly slow. But the payoff for fixing your credit is big. Better credit means:

• You’ll have an easier time getting approved for loans.
• You won’t have to swallow super steep interest rates on loans.
• You’ll avoid having to pay upfront deposits for utilities and cell phones.
• You’ll have an easier time renting an apartment.

The list goes on, because, whether we like it or not, credit matters.

OK, let’s get started. Here’s your three-step credit improvement plan:

1. Check your three credit reports
2. Pay current debts on time from now on
3. Assess how to deal with derogatory items
4. And a bonus: Get help from the (nonprofit) pros

1. Check your three credit reports

To deal with a challenge, you need to face it head-on. In the world of credit, that means pulling your three credit reports and going over each item. The three main credit-reporting companies are Equifax, Experian and TransUnion.

Go to annualcreditreport.com to get your three reports. (Be sure to print your reports or save them to your computer so you can access them later if need be.)

It’s important to check your reports at all three credit-reporting companies because they might contain different information. Your TransUnion credit report, for example, may be missing a loan that’s being reported to your Experian report, because not all lenders report to all three companies.

When you pull your credit reports you’re looking for two things: errors, and negative-but-accurate information. Marking each with a different-colored highlighter takes the drudgery down a notch.

Dispute errors

The first thing is to dispute any errors on any of your three credit reports. Use the online dispute form offered by each of the three companies to tell them there’s a mistake, or you can send a dispute by mail. (Be sure to file the dispute with the right credit reporting company — that is, if it’s on your Equifax report, file the dispute with Equifax.)

By the way, this is exactly what those “credit repair” companies that you may have heard of do. They dispute items on your report. You can do this yourself, no problem.

After a few weeks, the credit reporting company, having reached out to the lender, will respond to let you know if they agree with your dispute. If they do, great! You’re done. (It’s a good idea to keep an eye on your credit reports to make sure the promised changes are actually made.)

Often, however, the response will be something like, “The lender reporting this information on your credit report says this information is correct.” In other words, no dice. (The word often used in place of “lender” is “furnisher,” as in “the company that furnished this information” to the credit-reporting company.)

In that case, you need to reach out to that lender to ask them to fix their mistaken reporting of your account. Before you call the lender, gather as much information as you can about that account, including the account number and payment dates and amounts.

For example, if the account was paid in full but your credit report says it’s unpaid, then be prepared, if possible, to tell the lender the date and amount of your final payment. Also, be prepared to be bounced around on the phone till they get you to the right department.

And, a personal note from this former financial coach? It really helps to stay calm, polite, and persistent. For example, “Thank you. I hear what you’re saying. However, I know this information is incorrect. Please connect me with your manager so I can discuss this with them.”

If you’re really eager to get things moving, it’s fine to file a dispute with the credit-reporting companies and at the same time contact the lender that’s reporting that info.

List the negative-but-accurate entries

The second credit-report to-do is to figure out which of the accurate items might be pulling down your credit score. Some keywords that signal not-great news are “collection account” and “charged off” (that’s debt that went unpaid for a while and eventually the company wrote that debt off their books).

While any late payments will hurt your credit score to some degree, it’s collection accounts, charged-off debts and the like that deserve a closer look as you work on improving your credit. (We’ll talk more about these types of items in No. 3, below.) It can help to list these out, because knowing what the problem areas are will help you figure out how to proceed.

On the other hand, if you have “late payment” entries on your credit report on accounts that you either paid off in full or are currently paying off, there’s not a lot you can do, other than wait the seven or so years until they fall off your credit report. Did we mention that this credit-improvement stuff requires patience? Much, much patience. Take heart in the fact that the older an item gets, the less it hurts your credit.

2. Pay current debt on time from now on

For most people, a credit problem is really a debt problem. Our credit scores are based on what’s in our credit reports, and what’s in our credit reports is our debt-payment history and how much we owe.

If your credit is in dire need of help, there’s a decent chance you have some unpaid debts on your credit report (collection accounts, charge-offs, and the like). We deal with those types of items in the next section. But if you’ve got debts that you’ve been paying on, consider these tips to improve your credit:

• Pay on time. No matter what struggles you’ve had in the past to get bills paid on time, focus now, today, with a laser focus, on making on-time payments from here on out. The biggest factor in our credit scores is on-time payments. Plus, the credit score system puts greater emphasis on recent items than older items. The more you can pay on time from here forward, the better for your credit.
• Contact your creditors if need be. If you start to run into any financial hurdles that are going to make it hard for you to pay on time, reach out to your creditors, i.e., the lenders listed on your credit report. Some credit card companies, for example, will offer a short-term reprieve in the form of a little extra time to pay, and some offer more formal hardship plans. Read our story on how to get out of debt for more tips.
• Pay all bills on time. The focus on paying current bills on time goes beyond just the loans being reported to the credit reporting companies. You can help keep your credit in good standing if you pay all your bills on time. For example, if you quit your gym and neglect to pay your final payment, that account could eventually get sent to a collection company, which is highly likely to report that collection account to one or more of the credit reporting companies.
• Stop adding to your debt. If you’re feeling buried under a mountain of credit card debt, it’s crucial to stop using credit cards as much as possible. By getting a handle on an out-of-control credit card situation, you can start to improve your credit utilization ratio, which can do a lot to improve your credit score. You’ll also reduce the risk of getting in over your head such that you fall behind on your payments.
• Bigger picture: Dealing with high-interest-rate debt like credit cards is a huge boon to your overall financial health. The best way to navigate your way through this challenge is to create a budget or spending plan. (We like “spending plan,” rather than “budget,” because it suggests a plan for spending money, rather than the no-fun-everything-sucks feel of a budget.) For more tips, read our story on how to get out of debt. And if this feels too hard to do alone, we get that. Look for a nonprofit consumer credit counseling service for help. (See below for resources.)
• Consider your credit utilization ratio. The amount of your card balance divided by the card’s credit limit, times 100, is your credit utilization ratio. Getting that number below 30% is a great way to improve your credit score. If you’ve got a credit card with a balance that exceeds 30% of the card’s credit limit, then focus on paying down that card first (while always paying the minimum monthly payment on all of your debt). And remember that, with the credit utilization ratio, the lower, the better.

3. Assess how to deal with derogatory items

OK, you’ve reviewed your credit reports, and you’re staying on top of current debt. Heck, maybe you even created a spending plan. Cheers to you! Next step: Deal with derogatory items on your credit reports. Derogatory items include collection accounts, bankruptcies, liens, judgments, and the all-too-common “charged off” notation.

For derogatory items that aren’t a specific debt — usually this means a bankruptcy — there’s not much to be done other than wait for them to fall off your credit report in seven to 10 years.

With a derogatory item related to a specific debt, however, you might be able to take steps to mitigate the damage it’s doing to your credit. The question is, should you?

With old unpaid debt, there are two related questions: what to do about the debt on your credit reports, and what to do about the debt.

Regarding your credit reports:

• Negative payment history — i.e., you paid late or didn’t pay at all — will stay on your credit report for at least seven years from the date of your last payment. This is true whether a debt is noted as paid or unpaid on your credit report. Paying off a debt that has negative payment history does not remove that negative payment history from your credit report. However, its status should change to “paid” from “unpaid,” and that’s good for your credit, because…
• Paid derogatory accounts are less negative to your credit than unpaid derogatory accounts.
• Making a payment on old, charged-off debt will restart the seven-year credit-report clock on that debt.
• The older an item is, the less it hurts your credit score.

Taking all of those above factors into account, it can get tricky to figure out how best to proceed on the “I want to improve my credit” path.

For example, say you have a six-year-old unpaid credit card account, noted as “charged off” on your credit report. If you pay off that debt in full, you are restarting the credit-report clock. Restarting the clock isn’t great for your credit — you’ve dusted off that old negative account and now it’s going to be on your report for another seven-plus years. But, a paid account is better than an unpaid account! Still, that charge-off would have fallen off your report in a year or so…

Hmmm…As you can see, this stuff can get complicated.

To be very clear: No matter what your decision from an “I want to improve my credit” perspective, you owe that money.

Regarding this question from the debt perspective:

• If you borrowed that money, you owe that debt, and it’s possible you could get sued over it, which could lead to wage garnishment, liens, uncomfortable things like that. Not fun. (Side note: Always read your mail! And if you receive a court summons, show up.)
• There are statutes of limitation on how long you can get sued for unpaid debt. The length of time a lender or collection agency has to sue you is limited by state law. In California, for example, the statute of limitations for credit card debt is four years. After that point, you can’t get sued for that debt. The length of time varies widely by state and type of debt — it can be as long as 10 years. Search for “statute of limitations on debt collection by state.”

What’s the takeaway? Maybe it’s “there are no easy answers.” You could see how someone in California (or another state with a four-year statute of limitations on credit-card debt), might look at that six-year-old charged-off account and think, “Well, it’s going to fall off my credit report in another year or so. I already can’t be sued for it any longer. I’m really struggling to get my other bills paid. So, I’m going to put that particular debt at the bottom of my debt-repayment plan.”

But someone in a state where the statute of limitations on credit-card debt is 10 years? Whole different story.

Please note: We’re not advocating any particular decision in this example. We’re simply illustrating how people might decide to proceed. The best decision for any particular person will depend on their particular debt and financial situation, where they live, and more. It’s complex.

Which leads us to…

4. Get help from the (nonprofit) pros

As we’ve said, here at investor.com we’re not fans of the for-profit companies that charge big fees to “repair your credit.” But we do feel all the heart emojis for the nonprofit professionals who can help you manage your credit.

A consumer counselor will work with you to assess your situation. Usually that includes creating a budget and taking a close look at your debt — all the things we’re suggesting are smart strategies to improve credit. And, if your situation warrants it, they might suggest a debt management plan, in which the counselor negotiates with your credit-card issuers to come up with a payment plan that works for you.

Some resources we recommend:

• Search for a certified consumer credit counselor on the U.S. Justice Department website or the National Foundation for Credit Counseling website.
• The Consumer Financial Protection Bureau offers tips on how to tell the difference between a reputable credit counselor and a scam credit repair company.

The best thing about working with a consumer credit counselor? Working with someone who offers a nonjudgmental, experienced ear may be exactly what you need to get started on the road to a better financial future.

Next steps: Continue learning how to build your credit with the next story in our article, or read more of our popular credit card content.

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